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How Would You Save the Rupee?

India’s central bank stepped in Monday to arrest the rupee’s decline which fell to a record low of 61.21 against the U.S. dollar earlier this month.

The Indian rupee has had a tough time recently, falling to a record low of 61.21 against the U.S. dollar earlier this month. In the past two years, the currency has slid around 25% against the greenback.

Monday evening, the central bank stepped in, tightening the availability of cash to banks by capping its daily liquidity window at 750 billion rupees ($12.6 billion.) The RBI has not specified how long this cap will be maintained.

Tuesday morning, the rupee climbed to 59.17 against the dollar, its highest in more than two weeks.

The RBI’s move will temporarily tame the outflow of foreign money from India but it is unlikely to be enough to attract strong capital inflows, which would help prop up the currency in the short-term, said Sacha Tihanyi, an economist at Scotiabank in Hong Kong.

Some economists warn that the tightened cash availability could dampen economic growth, which has already eased to a decade low of around 5%.

“Tighter domestic liquidity will worsen the financial conditions for corporates and banks, hurting asset quality and the growth outlook,” Nomura economist Sonal Varma said in a note.

In a recent post, India Real Time suggested five ways to arrest the rupee’s decline:

Sell more dollars: This is a way to keep the rupee high but the ability to sell is limited by the size of India’s foreign exchange reserves.

Issue dollar bonds to non-resident Indians: The government did this during the balance of payments crisis in the 1990s.

Attract more foreign direct investment: This could be a positive step, but it doesn’t guarantee foreign money will come rushing into the country.

Raise interest rates: This would make Indian debt more attractive to foreign investors and curb inflation, but could also worsen the economic slowdown.

Curb currency speculation: This would reduce currency volatility but would be an artificial intervention in the market with short-term results.

What do you think the Indian government and the country’s central bank should do to help the rupee make a convincing, sustained comeback? Please add your thoughts in the Comments section and vote in our survey.